Background: Global carbon stocks in forest biomass are decreasing by 1.1 Gt of carbon annually, owing to continued deforestation and forest degradation. Deforestation emissions are partly offset by forest expansion and increases in growing stock primarily in the extra-tropical north. Innovative financial mechanisms would be required to help reducing deforestation. Using a spatially explicit integrated biophysical and socio-economic land use model we estimated the impact of carbon price incentive schemes and payment modalities on deforestation. One payment modality is adding costs for carbon emission, the other is to pay incentives for keeping the forest carbon stock intact. Results, Baseline scenario calculations show that close to 200mil ha or around 5% of todays forest area will be lost between 2006 and 2025, resulting in a release of additional 17.5 GtC. Todays forest cover will shrink by around 500 million hectares, which is 1/8 of the current forest cover, within the next 100 years. The accumulated carbon release during the next 100 years amounts to 45 GtC, which is 15% of the total carbon stored in forests today. Incentives of 6 US$/tC for the standing biomass paid every 5 years will bring deforestation down by 50%. This will cause costs of 34 billion US$/year. On the other hand a carbon tax of 12$/tC harvested forest biomass will also cut deforestation by half. The tax income will decrease from 6 billion US$ in 2005 to 4.3 billion US$ in 2025 and 0.7 billion US$ in 2100 due to decreasing deforestation speed. Conclusions, Avoiding deforestation requires financial mechanisms that make retention of forests economically competitive with the currently often preferred option to seek profits from other land uses. Incentive payments need to be at a very high level to be effective against deforestation. Taxes on the other hand will generate budgetary revenues by the regions which are already poor. A combination of incentives and taxes could turn out to be a viable solution for this dilemma. Increasing the value of forest land and thereby make it less easily prone to deforestation would act as a strong incentive to increase productivity of agricultural and fuelwood production, which could be supported by revenues generated by the deforestation tax.